Business Liquidation

The Three Types of Business Liquidation and How They Differ

Liquidation has been defined as the process by which a company in whole or in entirety is brought to a close and its corporate properties and assets redistributed to the owners but with first priority to the creditors with unsettled accounts. There are essentially three types of business liquidations two of which are voluntary and one compulsory. Which is which and when are they employed will be discussed further as we go along. 

The Forced Liquidation occurs as enacted by a court order which in turn has been brought up to court through a petition set up by disgruntled unhappy and unpaid creditors. Such removes all powers of the directors and strips them of any control with regard to the business assets. A liquidator is appointed by either the court or the petitioning creditors themselves. Where proven that the business operated under the knowledge that they are insolvent, it constitutes to other serious consequences and extends liabilities up to the directors’ personal assets.

A Creditors’ Voluntary Liquidation is one where the company in itself has declared that their financial state has led them to conclude that the entity has become insolvent. It is illegal to operate when one is insolvent. This allows the company to formally close and step down, appoint a liquidator, sell of its assets, pay off its creditors with the proceeds and close. But this should not be used to escape liabilities and to ensure such, the business first has to submit a declaration of insolvency and prove such claim.

It is important to take note as well that bankrupt or insolvent companies are not the only ones that can liquidate. Even solvent ones can do so too. This is called the MVL or the Members’ Voluntary Liquidation. Why does a financially able company want to close business? There are many reasons to this but common ones include: lack of willing successor to a family business, cessation of corporate purpose, loss of a significant member of the organization and willingness of directors to retire and redistribute assets to their own personal accounts to name a few.